SEC to Strike Back in Case Against Madoff Associates

The Securities and Exchange Commission won’t back down after its securities-fraud allegations against associates of Bernard Madoff were dismissed last week by a federal judge.

The agency had sued Robert Jaffe (pictured), Maurice Cohn and his daughter, Marcia, who ran Cohmad Securities Corp., a brokerage firm housed within Madoff’s office that steered billions of dollars in client money to him. It accused the defendants of helping Madoff conceal his investment operation from regulators. The defendants have denied wrongdoing.

According to people familiar with the case, the SEC is expected to file an amended set of allegations in the next few weeks to try to convince the judge to reinstate the fraud counts and proceed to trial. A spokesman for the agency declined to comment.

Last week, U.S. District Judge Louis Stanton threw out the SEC’s claim that the defendants aided and abetted Madoff’s fraud, saying the specific allegations in the agency’s lawsuit, even if true, weren’t enough to infer that the defendants may have had “fraudulent intent.” He wrote: “There is nothing inherently fraudulent about referring customers to an investment adviser for fees,” and the SEC can’t show they “knew of, or recklessly disregarded, Madoff’s fraud.”

Several lesser, rules-violation allegations still remain in the suit.

The suit was filed in June, and much has transpired since then. Two Madoff associates pleaded guilty, and the SEC has had more time to investigate the fraud.

Robert Jaffe

People familiar with the case say the SEC is expected to elaborate on claims in its original complaint that Jaffe “frequently made” requests to the Madoff firm for specific dollar amounts of gains in his Madoff investment accounts that would be applied to prior days, weeks or months. By asking to backdate gains months in the past, Jaffe should have known he was participating in a fraud, the commission had alleged in the suit.

Stanley Arkin, a lawyer for Jaffe, told the Law Blog that the judge “got it exactly right” and that Madoff duped Jaffe, just like he fooled SEC for years before his fraud was revealed.

Despite the commission’s allegation that Jaffe’s account reflected numerous backdated trades, the judge’s order suggests he thinks that the agency is alleging that very few or only one such trade occurred.

“An irregular trade date over the twelve years that Jaffe maintained an account…does not show reckless disregard of Madoff’s fraud,” the judge wrote.

The SEC plans to introduce examples of such trades in its amended complaint, people familiar with the case say.

Maurice and Marcia Cohn

In addition, say people familiar with the case, the SEC plans to change other initial arguments. For instance, the SEC initially alleged that Cohmad’s primary purpose was to fund the Madoff Ponzi scheme. However, in his dismissal, Judge Stanton pointed out that Cohmad was created in 1985, six years before the SEC alleged the fraud scheme began. Since the original suit’s filing, however, the agency has changed its tune, publicly stating that it believed the fraud dated to the 1980s.

The SEC will also bolster allegations that Cohmad employees had, unlike most Madoff employees, unfettered access to the nerve center of Madoff’s fraud, these people say.

Judge Stanton wrote in his dismissal that the Cohns were separated from the site of the fraud because they worked on the 18th and 19th floors of the Lipstick Building in Manhattan, where Madoff ran his market-making business. By contrast, Madoff’s fraudulent investment operation was housed on the 17th floor.

But a court-appointed trustee who is recovering assets for Madoff victims said in a June lawsuit that Marcia Cohn “had a master key” to Madoff’s office and gained access to the 17th floor “with regularity,” including on Dec. 11, 2008, the day he was arrested.

Steven Paradise, a lawyer for the Cohns, wrote in a reply to the trustee’s allegation that it’s “an implausible inference to assume that because a Cohmad employee had keycard access to [the Madoff firm's] investment advisory floor, the Cohmad Defendants were somehow aware of…[a] carefully concealed fraud.”

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The Law Blog covers the legal arena’s hot cases, emerging trends and big personalities. It’s brought to you by lead writer Jacob Gershman with contributions from across The Wall Street Journal’s staff. Jacob comes here after more than half a decade covering the bare-knuckle politics of New York State. His inside-the-room reporting left him steeped in legal and regulatory issues that continue to grab headlines.

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